Editor’s Note: The online edition of this article is an expanded version of the one in the printed Global Gaming Business magazine.
The world today seems to be becoming more about yin and yang… inter-connected, interdependent but often opposing forces. Gaming has not been exempted.
Among the most poignant and watched battles for supremacy within gaming is between the traditional, legacy “Macau model” used to develop, operate and market to the Asian marketplace and the new, upstart “Singapore model.”
The former has been around for decades, with tentacles going back 163 years; the latter, for seven months. Despite the rhetoric about the pros and cons of each, both models seem to be doing remarkably well, even more so in the context of the financial crisis that has rocked the rest of the gaming world back on its heels.
Within each model, there is an ongoing dialogue about the efficacy of focusing on the upper-tier or mass-market segments of the Asian marketplace. And, within the upper tier where Asian VIP gaming is found, there is also tension between the efficacies of third-party versus in-house VIP marketing programs.
There are broad implications to the future growth of Asian gaming in terms of how successful each of these models and marketing strategies will continue to be “as is,” whether the current model options and strategies will begin to morph into their counterpart keeping the best of both, or new models and strategies need to be developed.
But the question remains: how much of the success of these models in both venues is due to Asian VIP marketing? What is to be learned from the success generated thus far?
It is a slippery slope to try to address the Asian VIP gaming issue by drawing simple conclusions from this rather complex subject. So, like the antique ivory Chinese puzzle ball with up to 20 free spinning balls carved within from one block of ivory, let us try to unravel the puzzle of Asian VIP gaming, what is happening and where it is going one layer at a time.
The Macau Model
While casino gambling had existed in Asia and Macau for some time, Macau’s and therefore Asia gaming’s “Big Bang” came after the handover of Macau by Portugal to the People’s Republic of China (PRC). The new Macau government decided shortly thereafter to end the practice of granting a single, monopoly casino gaming license and open Macau gaming to three concessions to be awarded in an initial bidding process. This was followed by a series of events that led to the granting of three additional sub-concessions.
Much has been written and discussed about the Macau model from this starting point, but for the purposes of this article the critical elements are: the potential for an unlimited number of casinos (each casino licensee can own and operate more than one casino and, after a “no change” period that has elapsed, the government may issue more concessions if it so chooses); a relatively high gaming revenue tax rate of 40 percent; and, an evolutionary “Macau” attitude toward licensing and regulation rather than an immediate adoption of “world” licensing standards and gaming regulations.
The Macau model propelled Macau from 2002 to 2009 to the world’s largest gaming venue. During this period:
- casinos tripled from 11 to 33;
- the number of table games increased over 14 times to 4,770 tables;
- the number of slot machines increased 18 times to 14,363 units; and
- total gaming revenues increased five times to US$15 billion.
What part did Asian VIP gaming play in these events? During this period, Asian VIP gaming’s contribution to total gaming revenue ranged from 63 percent to 77 percent. As meaningfully, VIP baccarat generated a whopping 65 percent of the total $12 billion increase in revenue. After adjusting for profit margins, VIP baccarat still generated 41 percent of the increase in profit (as defined). It also retained its dominance over the next-closest game, non-rolling baccarat, at 31 percent, and slots at 17 percent. Every other game contributed relatively insignificantly to the increase.
Turning to 2010, despite the two casino openings in Singapore this year, Macau continues to do very well (an understatement): total gaming revenue is up year-over-year 68 percent year to date through July.
Macau Asian VIP gaming continues to play its part with as much force and fervor as before: VIP baccarat accounted for 71 percent of total gaming revenue. In its 2Q10 earnings release, LVS indicated rolling volume in 2Q10 among its three casinos increased 44 percent over 2Q09. Wynn Macau, historically positioned to cater to the up-market segments, declared it enjoyed a 72 percent increase in rolling volume.
In Macau there are two subsets to Asian VIP rolling business—the third-party junket/VIP room operator and the casino-inspired internal rolling programs commonly referred to as “premium direct.”
The origin of premium direct programs can be traced to Western operators. In contrast to Asian business practices where it is common for business partners to intertwine their businesses, Western business owners, particularly Western casino owners, loathe giving their profit to someone else. And so, some Western Macau casino operators began premium direct programs in an attempt to cut out the middle man, hoping to push their profit margin from the 12 percent range associated with commissions of 1.25 percent of rolling chip volume to margins solidly into the mid-teen and, at one point of perhaps naïve optimism, hoping to get to a margin of over 20 percent.
Working the numbers, target profit margins of mid-teen to 20 percent without the middle man would conceivably allow the casino to pay 0.7 percent to 1 percent in rebate directly to the player and another 0.1 percent for room, food, beverage, transportation and other comp credits, for a total payout of 0.8 percent to 1.1 percent. For Western readers, a 0.8 percent to 1.1 percent payment to a player amounts to 28 percent to 39 percent of theoretical win to the player (assuming an average 2.85 percent theoretical win on baccarat rolling chip volume). Such premium direct incentive rates would lead to approximately a 15 percent profit margin at the high end of the commission rate structure and 25 percent at the low end if—and this was a big “if”—they could attract the players away from the junket/VIP room operators.
The casino-inspired premium direct programs, however, faced the headwind of the junket/VIP room operators who already rebated between 15 percent and 30 percent of their commission to the player. When commissions were at 1.25 percent, this allowed the junket/VIP room operators to offer their better players 0.9 percent to 1.1 percent in the way of incentives and comp credits.
The spread between what the casino-inspired premium direct programs and the third-party junket/VIP room operators offered, superficially, looks competitive. But, junket/VIP room operators offered numerous other advantages, e.g., credit. Moreover, their philosophical approach was to compete more on a player-by-player basis (thus allowing them to move individual players up their commission strata and/or even exceed the limit for their best players) versus the Western operators, who philosophically competed more on a formulaic, fixed strata basis.
In execution, the premium direct programs were understandably slow to get traction. For the casino owners who initiated them, these programs initially amounted to only 10 percent to 15 percent of their total VIP gaming revenue. Those casino owners who pushed the premium direct programs have been able to generate as much as 25 percent of their rolling play generated by this program. Be careful, though, because the same operators who push their premium direct programs may also be those who de-prioritize the VIP/junket programs, lowering the total. And, for the record, some casino owners—Asian owners predominantly—choose to minimize or not offer premium direct programs at all.
Insight to the current relative importance of third-party junket/VIP programs and in-house premium direct programs can be gleaned from LVS’ 2Q10 announcement that its VIP/junket operator rolling volume constituted 76 percent of their total reported reporting volume at their largest Macau casino and flagship, Venetian Macao (Cotai), with their “in house” premium direct program generating the other 24 percent.
Despite the high gaming revenue tax rates and high commissions paid in a venue dominated by commission-based VIP rolling programs, 2Q10 EBITDA margins for LVS/Sands China Limited consolidated Macau operations was 29.9 percent and for Wynn Macau 30.3 percent. There are, however, lower examples among other companies in the 11 percent and 18 percent range, but they seem to be those companies with still good if not high volume but less higher-margin mass market gaming demand and a lower capital base—making such results still palatable and in some cases still impressive.
With revenue growth rates that would make most giddy, the Macau model appears to be working. Facing higher 2H09 base numbers, 1H10 growth rates are not expected to be maintained for the remainder of the year. But, even so, most are projecting a minimum year-end gaming revenue number of $20 billion, which would represent a $5 billion increase over year-end 2009, a nice increase of 33 percent. Virtually every gaming venue and every gaming executive outside of Macau will be envious.
The Singapore Model
If Macau is destined to be Asia’s eastern capital of gaming then it would seem that surely Singapore is destined to be its western, at least for the foreseeable future.
In contrast to Macau at the handover, which had a well-established casino gaming industry, Singapore had nothing at risk and was unencumbered in terms of how to launch it.
Singapore’s gaming policy did not develop in a total void, however. Singapore was a modern, successful, well-diversified economy. Singapore also had a hard-earned reputation as a very efficient, business-oriented country that was “squeaky clean.”
The key elements of the Singapore model are: only two licenses are to be issued with a government guarantee that no more will be issued for a long period of time; a strict (even by Western gaming standards) licensing and regulatory environment will be installed from day one; and, a relatively low gaming tax rate was structured to motivate the presumably huge investment needed to develop two world-class, iconic integrated resorts that would also serve a larger goal, to increase tourism.
It worked. Genting Singapore and LVS went well beyond the minimums conceptualizing and building not just mega but meta, world-class iconic integrated resorts at a cost of approximately $4.5 billion and $5.6 billion, respectively. Combined, they offer approximately 1,000 table games and 2,600 slot machines, approximately 20 percent of the table game and slot capacity of Macau.
Resorts World Sentosa opened the first day of the Chinese New Year celebrations, February 14, and Marina Bay Sands approximately two months later, April 27. Both are opening in phases with a substantial amount of additional amenities still to open. And, like any new casino project of this size, they are also still on the acceleration portion of the growth curve.
Even so, early results from Singapore suggest that early fears that the Singapore government’s strict licensing of third-party junket representatives and VIP room operators would prevent the hugely expensive integrated resorts developed from ever showing a reasonable return on investment were at the least overstated and perhaps just plain wrong.
For example, analysts prior to opening were forecasting stabilized combined annual gaming revenue of between $2 billion and $3 billion. After seeing numbers being reported and listening to anecdotal comments, they are now revising their forecasts upward to between $3 billion and $4 billion excluding some outliers. As importantly, whereas EBITDA margins in Macau can reach 30 percent, 2Q10 EBITDA margins for Resorts World Sentosa, Genting Singapore’s integrated resort, was 58 percent and Marina Bay Sands was 44 percent. LVS COO Michael Leven expects this margin to ramp upward in the coming months. LVS Chiairman Sheldon Adelson’s oft-snickered-at predictions that Marina Bay Sands will produce $1 billion EBITDA when fully operational are now being discussed more seriously as a real possibility.
With respect to Asian VIP gaming and the junket/VIP operator portion of it, the scrutiny, time, effort and cost of securing a license in Singapore has apparently forestalled most from initially applying. Although nothing has been officially announced, street rumor has it that approximately 20 third parties have applied for a junket/VIP room/commission-based license but none have been granted as yet. Adelson recently speculated that he did not expect to see any “Macau” junket and VIP operators to be licensed in 2010.
This leaves the in-house premium direct programs as the only means to cater to Asian VIP players. How is this working? A Macquarie Equity Research report on Genting Singapore’s 2Q10 results suggested that the premium direct program at Resorts World Sentosa was generating 60 percent of their total gaming revenue versus 40 percent for the mass market, up from their estimated 50:50 split for 1Q10. LVS breaks out their reported numbers in more detail: For 2Q10, 42 percent of their total gaming revenue was generated by premium direct programs, 44 percent by table game mass market play, and 14 percent slots mass market play. No one will ever know what could have been possible with a fully operational third-party junket/VIP program in place in each property, but it is only fair to admit that initial performance has been beyond predictions and rather momentous without it.
When asked in their 2Q10 conference call, LVS confirmed that at Marina Bay Sands they are paying 1.2 percent of rolling volume directly to the players with some high-end player exceptions getting 1.3 percent rebates through their premium direct program. This would probably put the LVS Singapore rebates higher than their casinos are currently paying through their own premium direct programs in Macau or Macau junket/VIP room operators are rebating to their players under the 1.25 percent commission cap.
While no one is speculating LVS is doing so, given the respective tax rates, on strictly a bottom-line margin basis LVS would certainly rather have their VIP players play in the 12 percent tax environment of Singapore than the 40 percent tax environment of Macau.
In terms of relative competitiveness with Macau, be aware that even higher commission rates exist and have existed in Asia than paid in Macau or Singapore, e.g., rates as high as 1.6 percent to 1.8 percent, but these much higher rates have not resulted in any major visitor shifts away from Macau. In fact, these high rates in second- and third-tier venues demonstrate what kind of “price” variance is necessary to draw players away from the larger, higher-quality, more concentrated casinos in Macau and the variety of activities offered there.
The top-line revenue numbers and bottom-line EBITDA margins being generated in Singapore are testimony to at least the short-term efficacy of the respective overall project concept and positioning, and the structuring of their premium direct and mass marketing casino programs. The performance level at this early stage would also suggest that once fully open, the Singapore model will be deemed successful. We will have to wait, however, for that contention to be proven.
Tasseography and Asian VIP Gaming
Reading the current tea leaves of Asia gaming, signs seem to indicate that Singapore nor Macau are likely to change their models anytime soon. This contention should not be misinterpreted to mean that there are not causes to do so. There are.
In Macau, external pressure will continue to mount for it to improve its regulatory framework to western/ world standards. This will not cease. Even absent outside influences, internally the Macau government, Macau casino owner/operators, and Macau junket/VIP room operators in their own self interest should nudge each other along to do so before an incident occurs which brings western regulators in to take a closer look; an untoward incident waves away a potential major future gaming and/or non-gaming Macau investor; or a Macau based bidder for a gaming license in a valuable new Asian venue is consciously or subconsciously looked at askance for operating in Macau removing them from contention. All of these forces and others not mentioned conspire to motivate change. But, since real jobs and a growing but essentially ‘one industry’ economy are at stake, such changes should in most instances be evolutionary not revolutionary. Regardless, movement needs to both be made and shown.
Independent of the regulatory issue, Macau junket/VIP room operators should also consider their future along other dimensions as well. For example, the ongoing question of where the existing junket/VIP operators will find the capital needed to expand and new operators the capital to start raises any number of issues. This is particularly true if they want to do so by taking in new non-Asian individual or privately held companies, use capital/equity funds from Asia and beyond, seek traditional bank or bond debt, or by going public. Here again, ownership, transparency, probity, and reputation come into play.
For those Macau junket/VIP room operators who want to expand with the expansion of Asian gaming, they need to position themselves now so that they can go and be welcome anywhere. There is too much at stake in terms of their ability to generate future earnings not to do so.
And, one more morsel of food-for-thought: given the diminished gap between Macau junket/VIP room marketing programs and certain Internal premium direct programs, junket/VIP room operators might consider being acquired by a gaming company as a monetization strategy. Likewise, they might also consider acquiring casinos, purchasing a gaming company, and/or building casinos so they operate their own casinos applying the marketing acumen that has made them so successful to date and keeping the profit margin now going to the casino owner. These strategies also require rethinking and change.
Even though it is hard to secure hard numbers since most junket and VIP room owner/operators are privately held and there are instances of possible cross ownership, insiders note that the revenue generated by them has been steadily aggregating to the point where five to ten large operators out of the 70 to 100 operators that may exist at any given point in time generate 80 percent of the total. The large operators have also grown larger over the years. While there is no formal structure, this consolidation can lead to cartel-like behavior by the largest operators. This added to the already established practice by the operators and tolerance by the casino owners of junket/VIP room operators serving more than one Macau casino at one time makes them even more powerful for any given operator.
On the positive side, large operators have the organization to penetrate the broad geographic expanse of the PRC and the Asian marketplace. It also allows the large operators to spread their working capital and credit risk, create operational and marketing efficiencies, leverage the learning curve of how to work with the casino owners and government regulators, and to build a clean regulatory record measured in years. One cannot help but think, however, that some disaggregation would be a good thing even if that comes from aggregation below the top tier so that more junket/VIP room operators fall into the “large” category and/or new operators enter the field.
Singapore on the other hand, should speed up its licensure of license-able junket/VIP room operators, existing or new, individuals or companies that can pass their strict probity tests. If the existing, traditional junket/VIP room operators will not submit for licensure or cannot be licensed if they do, then new owner/operators and programs need to be found that are licensable. On the operating side, perhaps, just perhaps, there might be reason for tweaking some of the tweak-able elements of their regulations in order to attract greater interest among junket/VIP room operators but only if based on sound reasoning.
Such an exercise would be no different than what has occurred in other start-up gaming jurisdictions, including New Jersey known for its strict compliance philosophy. Why do this when the Singapore Model seems to be working? Because third parties can be very effective in generating tourism, leisure, entertainment, and gaming demand. There is nothing inherently nefarious about commission-based, rolling Asian VIP programs any more than there is something inherently nefarious about airline frequent flier programs. At their core, they are both marketing tools and Singapore will need all of the marketing tools it can get to generate the volume to achieve its tourism and economic diversification goals not to mention providing the means for the two casino operators to earn a justifiable return for the world class, brilliantly executed, and “noble” projects they build but which were also very, very, very expensive. To allay immediate fears of eroding the Singapore Model until it becomes something else, such changes should (must?) result in a new form of Asian third-party junket operators, VIP room operators, or a new form of generic third-party casino marketers, all rightful sub-element of the Singapore Model without changing its basic principles.
There is a raft of other issues simmering about associated with Asian gaming and Asian VIP gaming that would benefit from frequent, open, and honest dialogue between and among the stakeholders. All are served if this should occur; only a few are served if only a few participate; and, none are served if events unfold individually based solely on selfish and opportunistic motives. Those responsible for Asia gaming must be willing to change and Asia gaming must change if it is to reach its full potential just as gaming has had to change everywhere else gaming has become a major business and economic force. This is a certainty.
Tasseography is the art of reading tea leaves said to have originated in ancient China among other countries.. The anchor is a symbol used to represent luck, the clearer it is the better luck you will have and vice versa. Source: http://www.teausa.com/general/tearead/tearead1.cfm
